It looked like a combination of factors conspired against the Aussie market today with Bill Shorten’ s grab on cash franking credits announced this morning, the start of the Banking Royal Commission with NAB under the spotlight first up and another day that saw some big lines go through on the match which impacted some key heavy weight stocks on the index. The ASX 200 ticked down on an intra-day basis below the 5960 region we have in mind for our bullish bias to remain intact however a late rally saw it close +25pts from the session lows – and above that handle.

An overall move today of -21pts or -0.36% with the index settling at 5974 – Materials providing the biggest weight on the mkt.

In terms of the Labor Policy for cash franking credits, we’ll have more on it in tomorrow’s Market Matters Income Report, however briefly, the policy centres on restricting the cash payment / refund of accrued franking credits to those superannuants, and investors that receive them back in cash over and above offsetting tax payable. The announcement has a number of factors that we’ll delve into in more detail tomorrow with the help of a superannuation specialist, however suffice to say, we think the flagged move (assuming Labor win the next election) would impact a larger number of Australians than is initially being touted + it will also have unintended implications for particular assets.

For example, hybrids that are franked seem to be an asset that will be impacted negatively, while Tier 2 Subordinated Debt / Bonds etc. that are unfranked become naturally more appealing for some investors. Unfranked property trusts would also presumably become relatively better and that could put upward pressure on property prices.

Another obvious aspect that we can see from initial interpretations is that the ‘wealthy’ typically pay tax each year while those that are considered more ‘middle income’ can often be supported by cash rebates derived from franking credits, and it seems they would feel most pain.

On the flipside, it’s very clear that our current taxation system makes the domestic share market less appealing to overseas investors, simply because our imputation rules create distortions around the value of the same stream of earnings from an ASX-listed company. In short, franked dividends are more valuable to an Australian investor than to foreign investors and with about 30% of the ASX owned by foreigners, a change to the structure could feed a bigger appetite for 1. Offshore investors to focus more on Australia & 2. Australians to invest offshore.

Clearly, there are many things to think about when considering this potential change and suffice to say there will be many unintended consequences to such a change that Shorten, Keating and co simply have not envisaged – we’ll attempt to simplify it tomorrow.

ASX 200 Chart

ASX 200 Chart

Have a great night

James & the Market Matters Team

The above is an extract from the Market Matters afternoon Report. For a free 14 day trial of our service CLICK HERE

About this contributor

James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.

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Michael Mann
Mar 15, 2018

The budget may be paid down temporarily but we have all been around long enough to know the reality is that the cash will be spent by the Government in ways probably not even thought of yet.
Its the oldest trick in the book yet we fall for it every time because it appears we all are in the same boat. Take it from everybody and give the lot back to those the Government thinks really need it usually without consultation.
Its just another redistribution of wealth.